MF Direct Investing – Demystified

While investing in a mutual fund, it is important to understand the differences between direct plan and regular plan. For instance, investment in a direct plan helps an investor in two ways to generate better results than regular plan. The article outlines the broad distinctions between the two and how to invest in direct plan.

Capital market regulator, the Securities and Exchange Board of India (SEBI), has recently issued a circular that specifies the asset allocation that needs to be followed for the multi-cap category of funds. This has been done to make it ‘true to the label’. Irrespective of the outcome, this shows the proactive nature of SEBI when it comes to protecting investors’ interest. Exactly eight years back, one more such initiative was taken by SEBI in the interest of investors. In September 2012, asset management companies (AMCs) were asked to launch a ‘direct plan’ of their schemes. This came into effect from the start of the year 2013. The idea was to allow investors buy mutual fund schemes without any intermediary.

For these direct plans everything remained the same besides the expense ratio – be it investment objective, investment strategy, portfolio, exit loads, etc. Therefore, the direct plan includes those schemes where investors can directly invest in funds without involving any agent or intermediary. This allows investors to invest directly into mutual funds schemes without incurring the commission or brokerage cost that was earlier paid to distributors or banks. The funds which involved distributors or any intermediary become the ‘regular plan’.

Since funds with direct plan have lower expense ratio as compared to the regular plan, the net asset value (NAV) reported by the direct plan will be higher than the regular plan. This is because your NAV is the net of expense ratio, which means expense ratio is deducted directly from the fund’s NAV. Therefore, the lower expense ratio of the direct plan helps the fund to outperform the regular plans. This outperformance becomes bigger with time as the compounding effect kicks in.